Obama offers budget deal on Social Security and taxes

A modest tax increase that Republicans embraced months ago will be part of President Barack Obama's budget proposal set for release next week, White House officials said on Friday.

The proposal would change how Social Security pension benefits are periodically adjusted for inflation and, in doing so, also change the adjustment of federal individual income tax brackets, resulting in slightly higher taxes for many Americans.

The idea - involving a measure of inflation known as the chained Consumer Price Index, or chained CPI - was backed in December by House of Representative Republican leaders. White House officials detailed it ahead of Wednesday's budget release.

Chained CPI is staunchly opposed by many Democrats as well as labor and retiree groups because it would reduce some Social Security benefits. By offering it in his budget as a concession, Obama could be trying to bring Republicans back to the deficit-reduction negotiating table in coming weeks.

Republicans backed chained CPI as a way to raise $200 billion over a decade in an offer when the two sides were dueling over how to avert the $600 billion "fiscal cliff" mix of tax hikes and spending cuts that loomed at the start of the year.

House of Representatives Speaker John Boehner and other House Republican leaders signed a Dec. 3 offer that proposed chained CPI. Boehner spokesman Brendan Buck said on Friday that the speaker is still open to such a move.

So where does the tax boost come in?

Switching to chained CPI from the CPI measure now used by Social Security would also change tax bracket adjustments so that they would occur less often. As a result, Americans with rising incomes would see more of their income move more quickly into higher tax brackets. This is known as "bracket creep."

"Chained CPI increases revenues because we adjust the tax code by that measurement of inflation," said Steve Bell, senior director of economic policy at the Bipartisan Policy Center, a think tank, and a former adviser to congressional Republicans.

BIPARTISAN IDEA

Many bipartisan deficit-cutting groups have proposed moving to chained CPI, including the so-called Simpson-Bowles commission and the Bipartisan Policy Center.

"I can't explain," how Republicans can back a tax hike, said Stephen Entin, an economist at the conservative Tax Foundation think tank and former Treasury official under President Ronald Reagan. "It is usually put forward as a technical adjustment, but it is also a tax increase."

Supporters of the switch say the standard CPI index overstates price rises, but opponents say moving to chained CPI would unfairly deprive older Americans of benefits they have been promised.

In addition, because more affluent taxpayers can't be bumped beyond the top bracket, the change would tend to bite hardest among middle-class taxpayers, according to the non-partisan Tax Policy Center.

About three-quarters of households would see a tax hike, TPC said in an analysis, with those making between $30,000 and $40,000 seeing the biggest cut in after-tax income - on average about 0.3 percent.